Is The Bottom Almost Here?

[vinod1]

26 minutes ago, TwoCitiesCapital said:

 

Corporate margins have been rising for the last 15 years. They've spent most of that time at 9-12% which is elevated relative to history and has never persisted before. So the 13.3% was the end of what has otherwise been a consistent trend in corporate profits that has been exceptionally elevated and doesn't seem terribly out of place compared to the ~12.5% that was accomplished ~2019 without the assistance of trillions of stimulus and 0% rates. 

 

What did inflation average over that period? Something in the ballpark of like 1.5%. 

 

So yes, I believe elevated corporate margins were, in part, in response to stable and low inflation. 

 

Why is it hard to see how these might be related? Maybe corporations can spend excess profits consolidating industries, eliminating overlapping jobs, and keeping the supply of labor high to keep inflation/labor pay low? Maybe they can spend excess profits lobbying for lower taxes and less burdensome regulation? Maybe they can spend excess profits doing things that support further excess profits instead of not having those profits by being behind the ball on inflation?  

 

And what else did we see over that period? Multiples applied to profits that have previously only been seen at the top of cycles to persisted for years! They're still persisting! Everyone talks about how this is the most predicted recession in history and yet we trade at 19-20x earnings that are already shrinking going into it! Those aren't recessionary prices! 

 

So yes, I think it's clear that the recent history inflation is very related to profit margins and multiples - just as it has been historically.  

 

 

 

Margins averaged 8.5% from 2010 to 2020. They were 12.6% in 2021. I made a mistake, they were not 13.3%.

 

Look at the table of profit margins. Do you really think they are spectacularly on the outlier side? Would you think those were sustainable margins in the next few years? Or would you make an adjustment for them to fall down a little?

 

Vinod

Year.pdf

[vinod1]

30 minutes ago, TwoCitiesCapital said:

So yes, I believe elevated corporate margins were, in part, in response to stable and low inflation. 

 

Why is it hard to see how these might be related? Maybe corporations can spend excess profits consolidating industries, eliminating overlapping jobs, and keeping the supply of labor high to keep inflation/labor pay low? Maybe they can spend excess profits lobbying for lower taxes and less burdensome regulation? Maybe they can spend excess profits doing things that support further excess profits instead of not having those profits by being behind the ball on inflation?  

 

And what else did we see over that period? Multiples applied to profits that have previously only been seen at the top of cycles to persisted for years! They're still persisting! Everyone talks about how this is the most predicted recession in history and yet we trade at 19-20x earnings that are already shrinking going into it! Those aren't recessionary prices! 

 

So yes, I think it's clear that the recent history inflation is very related to profit margins and multiples - just as it has been historically.  

 

 

 

In the stable and low inflation 2000-2010 period, profit margins averaged 5.8%!! 

 

Stable and low inflation is well and good for stocks, but there are some very significant changes going on. Even Grantham finally agreed and confessed to his sins and repented in 2017/18. He agreed profit margins are not going back. I have that GMO article lying somewhere on my PC.

 

Tax rates are one clue. Changes in the structure of the companies is another. Shifting of labor expenses to lower cost countries is another and so on. Inflation? Not so much. 

 

Vinod

 

[SharperDingaan]

Inflation is a bet on market rates going higher/lower. Buy a bond and the change is duration x face value x bp change in market rate. Buy an equity and the change is duration x price paid/share x bp change in market rate. The mystery is the duration of the equity in question … theoretically, the estimated time (years) to recover the purchase cost via reinvestment of dividends and expected buybacks.

 

Duration on a start-up? Expected time to bankruptcy. Duration on a consumer goods company? Purchase price/dividends. Duration on a smaller o/g (commodities) company? Purchase price / (dividends + buybacks). So what? …. The higher and more frequent the total dividends (annual + special), and the more spent on buybacks; the shorter the duration, and the less adverse effect to rising real market interest rates. So what? … where are real market interest rates currently at, versus times past?

 

If you paid a lot and rely on good management to produce consistent rising EPS, to fund ongoing dividends (widows & orphans’ stocks), your duration is high; and rising real rates hurt you.

 

If you paid little (re: high volatility) and rely on changing commodity prices to produce both special dividends and buybacks; in a rising commodity cycle, duration rapidly shortens, and rising real rates have much less impact. Your unexpected cashflow also allows you to exploit the opportunity.

 

At roughly a 4%+ coupon, it makes a lot more sense for gran/grandpa to simply hold zero-risk treasuries versus blue-chips. Gran/grandpa have enough reliable cashflow to eat, and our unlikely to outlive their stash. Money moves to treasuries, account AUM rapidly declines, and a great many salespeople become poor as trailer fees disappear; there is a reason why the industry does not want higher market rates of interest, and commodity stocks are despised.

 

Happy hunting!

 

SD

[TwoCitiesCapital]

3 hours ago, vinod1 said:

For stocks to perform badly (not just compared to bonds) you need one of three conditions (1) war that devastates the economy (2) high and continuing inflation (3) financial crisis. Outside of these 3, stocks perform well. Which of these are you betting on? 

 

Vinod

 

I disagree on your 2) or at the very least would add "instability" in inflation as a separate option. The 70s had high inflation. They also had low inflation. It depends on the year in discussion. 

 

It's the instability in inflation I'm predicting.

 

It also helps that we're currently at war (have been for my entire life basically - but the one in Ukraine is to much larger scale than most of those "conflicts") AND that many banks will be having liquidity/profitability and potentially solvency issues as long as rates remain where they are given the relative yields on their portfolio of assets and the duration of such. 

 

So all 3? 

Edited April 10, 2023 by TwoCitiesCapital

[changegonnacome]

19 hours ago, KCLarkin said:

Change, Vinod is simply pointing out that stocks tend to have a growing "coupon". So comparing a static earnings yield to a bond (or inflation) isn't valid.

--

In your simple example.

 

Earnings(t0) = 100

Cost of Living (t0) = 100

Earnings (t1) = 105

Cost of Living (t1) = 105

 

The earnings are "real" in that they keep up with inflation (in this example). There are complicated reasons why this isn't the real world experience (for example, inflation causes maintenance capex > depreciation).

 

"So comparing a static earnings yield to a bond (or inflation) isn't valid."

 

Its the most valid thing in the world....investing is the practise of comparing things..... prospective returns relative to risk and opportunity costs........if you aren't thinking about the pricing of your next equity investment relative to other things you could also invest in (investment property's, bonds, private credit, yourself etc.) you are doing it wrong. Do these investments have different characteristics....YES.......does that mean you can't compare them......NO.......End of.

 

[Gregmal]

IDK, I still just think that unless you are retired, or like maybe on the very back end of your career, buying bonds is the equivalent of admitting defeat or hitting from the ladies t. If you're in your 20s/30s/40s....you have time. More importantly, for an average person, the bulk of their growth will simply come from savings. Its just such a dangerous game sitting around thinking you re smarter than the market and sustainably so...as in "Ima make my nut shucking and jiving around between bonds and CDs and occasionally stocks"....as Ive said many times, it says something that even in year where it all worked for them... short sellers and bearish prognosticators....most of the actually lost money! And the ones that did make money...the amount they made hardly compensated them for the years of lagging due to such framework. Weathering drawdowns is as integral and normal an aspect of investing as taking punches is to a being a boxer. All you gotta do is avoid the knockout punches. 

[mattee2264]

I think some of the market strength is because ROW is holding up a lot better than expected and so far is avoiding recession. And of course US employment is still very strong.

 

And the Fed has expanded its balance sheet to deal with the fallout of the banking crisis which has created additional liquidity in the system. 

 

But again it is what lies in the future once interest rates hikes fully transmit to the real economy and we see the impact of tightening lending and so on. 

[SharperDingaan]

18 minutes ago, Gregmal said:

IDK, I still just think that unless you are retired, or like maybe on the very back end of your career, buying bonds is the equivalent of admitting defeat or hitting from the ladies t. If you're in your 20s/30s/40s....you have time. More importantly, for an average person, the bulk of their growth will simply come from savings. Its just such a dangerous game sitting around thinking you re smarter than the market and sustainably so...as in "Ima make my nut shucking and jiving around between bonds and CDs and occasionally stocks"....as Ive said many times, it says something that even in year where it all worked for them... short sellers and bearish prognosticators....most of the actually lost money! And the ones that did make money...the amount they made hardly compensated them for the years of lagging due to such framework. Weathering drawdowns is as integral and normal an aspect of investing as taking punches is to a being a boxer. All you gotta do is avoid the knockout punches. 

 

In your 30s/40s you buy sovereign zero-coupons at cents in the dollar. I have friends who collectively bought Greek 25yr zero-coupons during the 2011 crisis at yields in the teens, and resold at yields in the high single digits. 7-10x gain in maybe 6 months. Sadly, at the time, we didn't have the means to take them up on their invitation.

 

If you know your stuff, there is way more money to be made in bonds. 

Bentley's vs Porsche's exist for a reason.

 

SD

Edited April 11, 2023 by SharperDingaan

[Gregmal]

1 minute ago, SharperDingaan said:

 

In your 30s/40s you buy sovereign zero-coupons at cents in the dollar. I have friends who collectively bought Greek 25yr zero-coupons during the 2011 crisis at yields in the teens, and resold at yields in the high single digits. 7-10x gain in maybe 6 months. Sadly, at the time, we didn't have the means to take them up on their invitation.

 

If you know your stuff, there is way more money to be made in bonds. Bentley's vs Porsche's exist for a reason.

 

SD

Lol true, but generally speaking. If you know what you’re doing you can probably just sling derivatives and other exotic product. But for the normal persons, and I’m talking CDs, government bonds, etc…like where you get 5% with zero shot at anything more…..total waste.

[changegonnacome]

11 minutes ago, Gregmal said:

IDK, I still just think that unless you are retired, or like maybe on the very back end of your career, buying bonds is the equivalent of admitting defeat or hitting from the ladies t. If you're in your 20s/30s/40s....you have time.

 

For sure.......but at the same time you've got to ask yourself investing in anything where both the equity 'coupon' is TBC and the liquidation price of the investment is subject to timing (when you need to sell it) and valuation risk (how much the market is paying that day on an earnings multiples basis at that time)......that you are being adequately compensated for that risk relative to perhaps more certain alternatives...bonds, investment properties etc.....ERP, with all its shortcomings that I am not ignorant too, is a measure at a point in time of the reward to the risk your being paid to hold an instrument where the "coupon" is variable....& indeed the future price redemption level is variable.........it is not a panacea.....but your investing acumen, decision making over time and so your ability to 'pick winners' is not a certainty either.......while holding an index does not excuse you from risk also.....price matters.........lost decades happen in indexes too if the 'buy-in' price is too high and the alternatives available to you contemporaneously were better........ask our Japanese friends.....or maybe ask a Nov 2021 vintage QQQ purchaser now or indeed in 3/5 years time....right now that QQQ purchaser would be immeasurably better off, if he/she had a time machine, 'investing' in a ZERO coupon FDIC insured checking account....christ even cash stuffed in a mattress would have outperformed QQQ in that period. ERP in Nov 2021 was 'wrong' of course.....bonds were in a bubble, a 3000yr hum-dinger of a bubble....so the ERP looked reasonable because your comparing one variable (bonds) that were in a unsustainable bubble against another thing....it was a useless measure back then.....the mistake of course was not recognizing that. The ERP failed then.......it is not perfect. Don't ever remember saying it is...but if you told me that the 10yr/30yr treasury for the next 10yrs was going, to on average, be around the current zipcode of where we are now.....I would argue you are making an error buying SPY at 4100......the earnings outlook is IMO average to poor....& your paying too high a multiple for those earnings relative to alternatives. Thats my opinion

 

For example on our bond versus stocks argument....I'd be willing to wager.....with anybody....that purchased today and sold in exactly one years time........that a 30yr treasury bond with its paltry 3.6% coupon....sold in a years time at mark to market will very very likely outperform SPY/QQQ incl. dividends on a total returns basis......I'm assuming here of course that our 30yr bond gets some capital appreciation at our point of sale because the Fed has started cutting rates in 2024 & we redeem above par while picking up 3.6% in the intervening period.....I'm also assuming SPY earnings continue to shrink....and multiples on those contracted earnings shrink too as optimism turns to pessimism.

[Gregmal]

7 minutes ago, changegonnacome said:

I'd be willing to wager.....with anybody....that purchased today and sold in exactly one years time

I would ask the question who invests with this mentality, but it seems a lot of people do. 
 

In general I don’t think one should be in the stock market if they think +/- 10% is a big deal either way. It’s just kind of arbitrary and in hindsite stating that buying the absolute top on the Nasdaq was a bad move, seems to be as well because even if you did, DCA take care of this and chances are you also bought lower than the top prior or have the ability to after as well. If I had listened to all the valuation experts warning about buying MSFT at the top of the tech bubble I’d never have bought a tech stock during the last decade. You just have to accept certain risks when investing and there’s ways to mitigate them. Over time the people who are certain they have the crystal ball…never do. 

[John Hjorth]

19 hours ago, dealraker said:

... My view is that some businessmen, via their reasonably priced stocks, are going to get filthy rich during the years of this discussion.  

 

 

@dealraker,

 

First I got a good laugh reading it the first time, now I see the topic continue at good clip - with no response or reaction towards you. Now I can't help it any longer. 

[Gregmal]

Like there’s never, even in 2021 November, been a time where one couldn’t put in the work, and find a company or business or asset that they found attractive, and then just accumulated the position.
 

In fact I’d wager there is a huge bias with the famously over quoted, hindsite top tick dates like “last year cash did better than stocks stuff” if you move the goalposts back a bit…those scary sounding quotes become less relevant. For instance people also told us stocks were uninvestable in March and April of 2020 and now with hindsite look how many people claim to have been buyers and talk about it as if it was a no brainer? People also told us in 2018 a recession was right around the corner and the easy money bubble was gonna burst. Even here, how much more leeway do we keep giving the doomsday people? The $3000 predictions? Cuz we have and can continue to say “next quarter/year” etc…But…I’d say over the past 12 months there’s been plenty of glorious investment opportunity such that any of the 4-5% coupon just looks irrelevant. 

[dealraker]

1 hour ago, John Hjorth said:

 

@dealraker,

 

First I got a good laugh reading it the first time, now I see the topic continue at good clip - with no response or reaction towards you. Now I can't help it any longer. 

Hey John...the August/September 2011 panic out of stocks was one I remember very well.  It even almost, but not quite, got some of my otherwise very solid family members.  But it wiped clean the equity stakes of many I know...

 

...right at the dead bottom!  Stocks, expecially according to the younger guy in my investment club, were to be avoided at any cost.  We had some 1 vote victories to keep stocks like Lowe's.  It was a very close call with cut-and-run.

 

Years of fear dominated from March 9th 2009 and the only thing that got the conversation changed was the lust for Bitcoin.  Not that family members or club members did much biting on the bit, it was just the Bitcoin story was so fascinating that these people forgot they were supposed to be in panic mode!  

 

But a full decade of horrors and fears conversation with those making ten times their fear stating point would in most cases get people to stop talking about it.  But not this bunch.  

 

Of course fears seem far more rational today.  The problem is simply that that's always the case.

 

Sell before May...they say!

Edited April 11, 2023 by dealraker

[TwoCitiesCapital]

On 2/14/2023 at 7:46 PM, Sweet said:

2015 did not have two consecutive quarters of negative growth:

 

Q4 '15:  +0.6%

Q3 '15:  +1.3%

Q2 '15:  +2.3%

Q1 '15:  +3.3%

 

The working definition of what is considered a recession was always two negative quarter until last year.  

The economy did contract for two quarters - it wasn’t a quarterly anomaly.  There is a chance that we have had the recession and the bottom is in.

 

And remember, the covid induced recession was enormous, and it wiped out a lot of businesses and a lot of wealth.

 

I’m not claiming to know if the bottom is in, because I can’t know, but I do feel there is an elephant in the room.

 

 

 

Q1 corporate earnings will start rolling in soon. Expected to be down 6-7% YoY from Q4s ~4-5%. In other words, the declines in earnings are accelerating (even while it was an easier comparison as Q1 2022 was a decline from Q4 2021). 

 

What is it when you get 2 straight quarters of corporate earnings in different quarters following 2 quarterly declines in GDP? 

 

Current consensus for Q1 GDP is +1ish%, but Atlanta Fed GDP Now has it at 2.2%. But it has been declining for weeks with new data and may continue to come down. 

 

Is the recession still over if Q1 or Q2 GDP comes in negative even though there were positive quarters in between? Is the recession over if corporations are only just now feeling the pain and the labor markets is only just now beginning to soften? 

Edited April 11, 2023 by TwoCitiesCapital

[SharperDingaan]

1 hour ago, Gregmal said:

I would ask the question who invests with this mentality, but it seems a lot of people do. 
 

In general I don’t think one should be in the stock market if they think +/- 10% is a big deal either way. It’s just kind of arbitrary and in hindsite stating that buying the absolute top on the Nasdaq was a bad move, seems to be as well because even if you did, DCA take care of this and chances are you also bought lower than the top prior or have the ability to after as well. If I had listened to all the valuation experts warning about buying MSFT at the top of the tech bubble I’d never have bought a tech stock during the last decade. You just have to accept certain risks when investing and there’s ways to mitigate them. Over time the people who are certain they have the crystal ball…never do. 

 

Everytime one buys a bond fund, one does exactly this. Does one realize that at the time? ..... probably not.

 

SD

 

Edited April 11, 2023 by SharperDingaan

[Sweet]

28 minutes ago, TwoCitiesCapital said:

 

Q1 corporate earnings will start rolling in soon. Expected to be down 6-7% YoY from Q4s ~4-5%. In other words, the declines in earnings are accelerating (even while it was an easier comparison as Q1 2022 was a decline from Q4 2021). 

 

What is it when you get 2 straight quarters of corporate earnings in different quarters following 2 quarterly declines in GDP? 

 

Current consensus for Q1 GDP is +1ish%, but Atlanta Fed GDP Now has it at 2.2%. But it has been declining for weeks with new data and may continue to come down. 

 

Is the recession still over if Q1 or Q2 GDP comes in negative even though there were positive quarters in between? Is the recession over if corporations are only just now feeling the pain and the labor markets is only just now beginning to soften? 

Q3 of 22, Q4 of 22, and likely Q1 of 23 have positive growth.

 

I don’t think we should be trying to redefine what a recession to fit particular arguments.

 

[TwoCitiesCapital]

1 hour ago, Sweet said:

Q3 of 22, Q4 of 22, and likely Q1 of 23 have positive growth.

 

I don’t think we should be trying to redefine what a recession to fit particular arguments.

 

 

Hardly "redefining". As demonstrated in my post following the one quoted above, there have been a number of historical recessions that didn't fit the two quarters rule ever or at the time they were announced. And as for the two we just saw? NBER still hasn't declared one to have started suggesting we might have e another exception (though it's possible they still do and maybe even probable that they still do). 

 

Was just curious if the recession was still "over" despite the continued deterioration in economic indicators, corporate performance, and now employment softening, despite GDP turning positive on the inventory cycle and the boost from energy exports post-Russian sanctions. 

Edited April 11, 2023 by TwoCitiesCapital

[Sweet]

8 minutes ago, TwoCitiesCapital said:

 

Hardly "redefining". As demonstrated in my post following the one quoted above, there have been a number of historical recessions that didn't fit the two quarters rule ever or at the time they were announced. And as for the two we just saw? NBER still hasn't declared one to have started suggesting we might have e another exception (though it's possible they still do and maybe even probable that they still do). 

 

Was just curious if the recession was still "over" despite the continued deterioration in economic indicators, corporate performance, and now employment softening, despite GDP turning positive on the inventory cycle and the boost from energy exports post-Russian sanctions. 

I see what you mean.  So rather than a recession, just a period of sideways GDP both up and down.

 

I think that’s possible and I fear it could on for many years.  

[vinod1]

6 hours ago, changegonnacome said:

 

"So comparing a static earnings yield to a bond (or inflation) isn't valid."

 

Its the most valid thing in the world....investing is the practise of comparing things..... prospective returns relative to risk and opportunity costs........if you aren't thinking about the pricing of your next equity investment relative to other things you could also invest in (investment property's, bonds, private credit, yourself etc.) you are doing it wrong. Do these investments have different characteristics....YES.......does that mean you can't compare them......NO.......End of.

 

 

Holy molly! 

 

This is precisely the stuff of naive CNBC investors way back in early 2000's. It used to be called "The Fed Model". It has been debunked. Quite a few times. Separately and independently by people on different sides of the investment spectrum. I read this when the article first came out.

 

Here is one paper that lay bare the argument. Follow the link and download the PDF report in the Journal of Portfolio Management.

 

Fight the Fed Model, September 1, 2003 - Cliff Asness

 

https://www.aqr.com/Insights/Research/Journal-Article/Fight-the-Fed-Model

 

Conclusion: The very popular Fed model has the appearance but not the reality of common sense. Its lure has captured many a Wall Street strategist and media pundit. However, the common sense is largely misguided, most likely due to a confusion of real and nominal (money illusion).

Vinod

[vinod1]

6 hours ago, mattee2264 said:

I think some of the market strength is because ROW is holding up a lot better than expected and so far is avoiding recession. And of course US employment is still very strong.

 

And the Fed has expanded its balance sheet to deal with the fallout of the banking crisis which has created additional liquidity in the system. 

 

But again it is what lies in the future once interest rates hikes fully transmit to the real economy and we see the impact of tightening lending and so on. 

 

This is the argument I see again and again over the last 10 years. "I would have been right if not for the Fed".

[John Hjorth]

3 hours ago, dealraker said:

Hey John...the August/September 2011 panic out of stocks was one I remember very well.  It even almost, but not quite, got some of my otherwise very solid family members.  But it wiped clean the equity stakes of many I know...

 

...right at the dead bottom!  Stocks, expecially according to the younger guy in my investment club, were to be avoided at any cost.  We had some 1 vote victories to keep stocks like Lowe's.  It was a very close call with cut-and-run.

 

Years of fear dominated from March 9th 2009 and the only thing that got the conversation changed was the lust for Bitcoin.  Not that family members or club members did much biting on the bit, it was just the Bitcoin story was so fascinating that these people forgot they were supposed to be in panic mode!  

 

But a full decade of horrors and fears conversation with those making ten times their fear stating point would in most cases get people to stop talking about it.  But not this bunch.  

 

Of course fears seem far more rational today.  The problem is simply that that's always the case.

 

Sell before May...they say!

@dealraker,

 

I really appreciate that you are taking your personal time to respond to my posts.

 

This :

 

[Gregmal]

13 minutes ago, vinod1 said:

 

This is the argument I see again and again over the last 10 years. "I would have been right if not for the Fed".

The people who are bearish are almost always bearish. Their longs are savvy “trades” and otherwise seem perpetually positioned the same way. That Universa Fund comes to mind for mastering the art of…schemes. Although they all claim Q421 as their basis. This is precisely the noise most investors are better off ignoring. 

[thepupil]

4 hours ago, Gregmal said:

Like there’s never, even in 2021 November, been a time where one couldn’t put in the work, and find a company or business or asset that they found attractive, and then just accumulated the position.
 

In fact I’d wager there is a huge bias with the famously over quoted, hindsite top tick dates like “last year cash did better than stocks stuff” if you move the goalposts back a bit…those scary sounding quotes become less relevant. For instance people also told us stocks were uninvestable in March and April of 2020 and now with hindsite look how many people claim to have been buyers and talk about it as if it was a no brainer? People also told us in 2018 a recession was right around the corner and the easy money bubble was gonna burst. Even here, how much more leeway do we keep giving the doomsday people? The $3000 predictions? Cuz we have and can continue to say “next quarter/year” etc…But…I’d say over the past 12 months there’s been plenty of glorious investment opportunity such that any of the 4-5% coupon just looks irrelevant. 

 

So about a year ago, I started a thread arguing that bonds were starting to look like a real alternative to equities and were beginning to become more relatively attractive to equity indices. By alternative, I do not mean "you should sell all your stocks and buy bonds". By alternative, I meant that holding bondsas part of a diversified investment portfolio would cost less in opportunity cost than in the past because yields were perking up and becoming more competitive with yields on stocks. If you think stock indices will do 6-8% / year for 10 years or whatever, whether bonds yield 0%, 2%, or 4% determines the opportunity cost of holding bonds. 

 

an aside: 

I think I'm an outlier amongst folks here and probably my peers, but I think that the traditional 60/40 or 70/30 portfolio works well in growing and preserving purchasing power and is a reasonable approach; VWENX can work just fine for a lot of people (a relatively smooth 8.2%/yr since 1929 as the world's oldest balanced fund). Financial repression and ZIRP though forced people to either buy bonds are really really low yields or take on more risk to earn the same return and I view the reversal of that as a positive. TIPS offer real yields. bonds pay a withdrawal rate and arguably have less opportunity cost.I think Powell is mostly doing a good thing by returning to a normal cost of capital. there will be some adjustment, he may go too far, some shit may blow up, but I don't think we should be at ZIRP forever. 

 

back to bonds/stock:

Since that thread, bonds have made about 0% in total return. Stocks are down 5-6%. The market PE (using S&P 500/trailing PE on bloomberg) has de-rated from 21x to 18x, margins have come down and the index composition has changed such that EV/Sales has gone from 3.1x to 2.6x. 

 

On a very short term, 1 year basis, I'd say the idea of bonds becoming "reasonable" as part of a portfolio  was correct. I personally went from 0% to like 25% ish in bonds/cash/CLO AAA etc, but am now more like 85%/15% as found some opportunities. 

 

Looking at today, I still maintain it's not entirely crazy to have some bonds. What's interesting is that the nominal yield on S&P 500 was about 4.7% 1 year ago and is now 5.5% (so it increased by about 80 bps), but bonds also increased in yield from 3.2% to 4.4% YTW on Barclays agg index. So both asset classes saw a de-rating, it's just that reinvestment of coupon and lower duration is the reason that bonds OP'd stocks. that's what i like about bonds, in a rising rate/rising cost of capital environment you don't really lose much and aren't takin on general economic risks. the reinvestment of safe coupon keeps you in the game. 

 

I hope rates continue to rise (though I don't think they really can). I love having safe bonds/cash/whatever as a tool in the toolkit. stocks will (hopefully) destroy bonds over next 10-30 years, but nothing wrong with having some diversifitcation / other ways to preserve and grow purchasing power. 

 

@Gregmalwill say the indices don't matter. For many they do. they matter in terms of how I deploy $60K/yr where indices are my only option. 

 

 

 

 

 

 

[dealraker]

1 hour ago, John Hjorth said:

@dealraker,

 

I really appreciate that you are taking your personal time to respond to my posts.

 

This :

 

A tad of long term humor to go along with today's concerns.  Jan 10, 1975 dad dies, mom died years earlier.  I get a trust accessible at 30 years old, I'm in my teens.

 

13 stocks!  Chaos rules the world and most of them worth less over a decade later when I had access to the trust.   Along the way some got bought, one went to zero, and new stuff arrived out of some of them.  But none of them in 1975 exceeded $5,000 in market value.

 

The thing is I didn't volunteeringly sell anything ever, I was either too young (for over a decade) or too fearful and/or busy to sell.

 

Today just one of the stocks, yep just one, went up more in value than the total value of them all in Jan 1975.  LOL.